The Tariff Tango

By Fisher Investments Editorial Staff, 10/15/2012

In the wake of the global recession of 2007-2009, many (including us) have lauded many governments’ efforts to expand free trade—an economically beneficial overall policy direction that’s somewhat unusual relative to history. But whether sensible steps taken expanding economic efficiency and consumer choice last is another matter altogether.

Agreements increasing economic openness swept many countries, including some few could have foreseen. Taiwan and China’s Memorandums of Understanding gave greater access to each despite a contentious history involving much saber-rattling across the Strait of Formosa. India and Pakistan—neighbors with a history rife with conflict—have opened much more to trade with one another. Also exemplifying the move toward freer trade: FTAs between the US and South Korea; the US and Panama; the EU and South Korea; the EU and South American supranational bloc Mercosur and many more.

But for all these noteworthy successes, protectionism isn’t dead.

There are myriad ways in which protectionism can manifest itself. Some, like “Buy America” provisions embedded in in 2009’s economic stimulus legislation, may be misguided but likely carry only minor real, lasting economic impact on their own. Others are more severe forms: tariff enactment, export limitations (resource protectionism) and other restrictions.

Realistically, in the past few months rhetoric and restrictions have been increasing. While we’d suggest the overall global level of protectionism isn’t alarming or threatening to the bull market at this juncture, it is a trend worth watching.

In the past few weeks, an Australian proposal was introduced seeking vastly increased tariffs on steel imported from South Korea, Malaysia, Taiwan and Japan—to counter prices Aussie steelmakers claim are too low. Now perhaps the Aussie steel industry is having difficulty competing, but the fact is elevating prices on a basic good like steel is a move unlikely to reap big, positive economic returns. Moreover, one of Australia’s key economic advantages in recent years—one that largely drove them to avoid recession in 2008—was their proximity to bourgeoning Asian markets for Australia’s abundant mineral resources. But if you apply a tariff, history’s shown it’s unlikely those on the other side simply throw their hands up. The proposal hasn’t passed, and it likely isn’t big enough to have much global impact. It’s also possible the move could be challenged at the WTO. But either way, it’s a bad idea.

In Brazil, a country with a long history of protectionism, the Rousseff administration is pushing forward with increasing tariffs on about 100 different goods—with more possibly following. Brazil, South America’s largest economy, is also pushing the mantra of protecting local industry. One wonders, though, how consumers of these goods ranging from paper to steel will feel about higher prices. The policy doesn’t target any specific nation, instead focusing on the products themselves—a blanket application meaning the increased tariffs would likely withstand WTO challenge.

Meanwhile, China is engaged in trade tiffs with various nations. Japan. The EU. And, of course, the US. Earlier this year, the US slapped countervailing and anti-dumping duties on solar panels made in China. Thursday, the Commerce Department announced they’d look to increase the rates charged—which only makes solar panels more expensive (a bizarre policy for a government seeking to buoy the alternative energy industry via subsidy). China’s policy has been a bit back and forth in response, but in July the nation launched a probe to investigate raising tariffs on American and South Korean made solar components. Quid pro quo.

And there are American firms pushing for more in this election year. For example, US natural gas producers are seeking to export gas to take advantage of higher prices in foreign markets. Yet some American industrial firms are opposed—claiming gas exports should be restricted. You see, these industrials see cheap gas as a key competitive advantage, one which they’d like to maintain—even if it’s via government policy. In addition, both President Obama and Republican candidate Mitt Romney suggest tariffs on China as a (misguided) part of their economic policies.

There are protectionist actions in nearly every year of varying scope or size. As such, it’s critical to scale these moves relative to the overall global economy. By value, the China-US trade in solar panels is one of the larger industries these tariffs touch. Which, considering solar accounted for less than 1% of total US energy production in 2011, likely means these measures are more a trade paper-football-flicking contest than a trade war.

But protectionist rumblings are there to be heard, and in our view, investors would be well served to keep an ear tuned.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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